Grieving student loan borrowers across the country are finding out the hard way about a potentially catastrophic provision in many private student loan contracts: If the co-signer of the student loan dies, the loan holder can require complete and immediate repayment of the loan. Put differently, a student loan borrower who is making their student loan payments on-time, but whose co-signing parent (or other co-signer) dies, could be forced into default upon the death and be required to repay the entire loan immediately. The same is true if the co-signer declares bankruptcy. Furthermore, if the student loan borrower dies and has a co-signer, the lender can require the co-signer to assume full responsibility for the loan after the borrower’s death.
What lender would actually enforce such a provision? Not all that surprisingly, the Consumer Financial Protection Bureau (CFPB) said in a new report this past April that it has received complaints from student loan borrowers about being notified by their lenders that they have to fulfill their entire student loan obligation when their co-signing parent dies (full report available here). This is true even if their loans are in good standing and current. And, that’s not all; the lenders are also trying to collect from their co-signing parent’s estate (even if the student loan was not in default prior to the co-signer’s death). This could have a substantial impact on the size of the estate left for your loved ones after you pass.
However, it is not all that certain how often this happens. Richard Hunt, president and CEO of the Consumer Bankers Association, said that he is not aware of any lenders who practice this and called it a “rare occurrence.” It should be noted though that according to a recent report on private student loans published by the CFPB and the Department of Education, more than 90% of new private student loans were co-signed in 2011, often by a parent or grandparent; compared to only 67% in 2008. That combined with the increasing amount of outstanding student loans and the growing age of these co-signers, leads one to believe that this practice could become more than a “rare occurrence” in the years to come.
In addition, the CFPB stated in its report that based on the complaints from private student loan borrowers, the lenders were automatically placing these loans in default upon the death of a co-signer (i.e., immediately due in full). The death of a co-signer is usually determined by a third-party who conducts scans of public records of death filings, which are then electronically matched to consumer records and trigger a default, regardless of individual circumstances. Rohit Chopra, the CFPB’s student loan ombudsman, cautioned borrowers about the effects of such a default: “Borrowers need to be aware that these defaults can seriously impair their credit profile,” making it hard (or even impossible) to start a business, buy a house or buy a car.
Herein lies the problem: you have a student loan borrower who is making his/her payments on time and building his/her credit in order to obtain a loan for a business, house or car. Then misfortune strikes in the loss of a parent or other close relative (who is also the co-signer on his/her student loans). The student loan lender, by a search of the public records, discovers that the co-signer on this borrower’s loan has died and immediately, without consideration of the individual circumstances, places the borrower’s loan in default and calls for its full outstanding balance to be paid. Most borrowers will not be able to meet such a demand and this will destroy their credit for years to come. Their plan to start a business or buy a house will be delayed, if not, completely destroyed, all because of this little provision put in their student loan contract. And, not only that, but if the student loan lender collects from the deceased co-signer’s estate, it could substantially impact the amount left for the deceased’s loved ones. All but for this provision, this borrower may have been able to pay back his/her entire student loan balance in on-time payments like he/she was doing before the death of the co-signer.
Luckily for students and co-signers, you don’t have to wait for the private student loan lenders and the politicians to come to any agreement about how to best fix this problem. You can be proactive now. Many private student loan lenders do offer an option to release a student borrower’s co-signer after a certain period of on-time, consecutive payments and a credit check to determine if the student is eligible to repay the loan on his/her own. If your lender offers a co-signer release, you will want to ask about this benefit and remove your co-signer as soon as you are eligible.
However, many of the complaints that the CFPB received were from borrowers describing the many obstacles they faced when seeking to obtain such releases. In addition, many of the complaints stated that while borrowers often have to apply for the release, the lenders and servicers generally do not make the criteria for the co-signer release clear and transparent; nor do they make the required forms available on their websites or in electronic form. Moreover, lenders are not notifying students when their loans qualify to have the co-signers released.
While getting a co-signer released may seem like a daunting task, private student loan borrowers and co-signers should be proactive and try to obtain such a release. The CFPB has even released sample letters for both the borrower and co-signer to complete and send to their private student loan lenders (available here). Another option that you may want to consider is buying life insurance to cover what the outstanding balance of the loan may be on the death of either the student or co-signer. While it may be a relatively cheap option to purchase life insurance for a young borrower, it may not be for an older co-signer. If insurance is purchased it is important to make sure that the benefits are payable to that individual’s estate or are assigned by the beneficiary to settle the student loan debt. This should minimize the impact on your estate and loved ones if you were to pass away and the student loan lender required immediate and complete repayment of the student loans.
While we wait for more guidance on this issue, it is up to you to protect yourself. At the very least, the borrower and the co-signer should be inquiring from their private student loan lenders about how to apply for or obtain a release of the co-signer. This can be accomplished by placing a phone call to your lender or by completing and sending one of the sample letters that the CFPB provides on its website.
– Attorney Matthew. D. Brehmer
© 2014 Matthew D. Brehmer and Crummey Estate Plan.